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16 May 2007

Regional Law Schools and Lawyer Income

I recently conducted a survey of billing and financial information for the Indiana State Bar Association (ISBA). The results are going to be presented at an upcoming conference of solo and small firm lawyers.

One of the most surprising findings was the lower incomes of small firm lawyers (i.e., five or fewer lawyers per firm) in large metropolitan areas versus mid-sized and small and rural markets. For example, in my sample of approximately 1,200 Indiana lawyers in private practices, lawyers working full-time in 1 to 5 lawyer firms in large metropolitan areas [see map below, click to enlarge] made an average of $112,712 (n=318), versus $117,284 in mid-sized markets (75,000 to 200,000 residents) (n=104) and $117,741 in small and rural locales (n = 84).

Note that these results are not driven by leverage of a few high outliers; the entire distribution tends to be lower in the larger metro areas. Since household incomes are generally higher in these same locales, I would have predicted the exact opposite pattern.

In the famous Chicago Lawyers study (aka Chicago Lawyers I), Jack Heinz and Edward Laumann carefully analyzed their random sample of 800 lawyers and determined that the most salient division was between lawyers who served organizational clients, such as corporations, and those that provided personal services to individuals and small business. These two groups, which reflect a division that tracks not only clients but income, educational backgrounds, social networks, and bar affiliations, comprise the "two hemispheres" of the legal profession. In my sample, the attorneys in the 1 to 5 lawyers firms are the segment most likely to provide personal legal services; they also make up 52.3% of the private practice respondents.

So why are personal service lawyers making less money in larger markets? My working hypothesis is that graduates of urban law schools tend to stay in the area (indeed, many lived in the metro area before law school), thus oversupplying the region with personal service lawyers, heightening competition, and decreasing income. If this is true, it has important implications for so-called "local" law schools. Some additional data and my analysis follow the jump.

The chart below, which breaks down the sample by market and law school attended, initially suggested the possibility of a local school effect.

In the five large metros with a substantial number of respondents, three have law schools: Indianapolis (IU-Indianapolis), Chicago-Gary (Valparaiso), and Louisville (Brandeis). In each of these metros, the ISBA respondents are predominantly graduates of the local law school. (Not shown is Cincinnati-Middletown CBSA, which has Univ. of Cincinnati
and Northern Kentucky; although the total number of respondents there
is small, none attended an Indiana law school.)

As a preliminary test of whether the large number of local graduates depresses the income of personal service lawyers, I specified a linear regression in which the sample was limited to practitioners in 1 to 5 lawyer firms (n = 500). The dependent variable was the natural log of practitioner income. The following independent variables were statistically significant at p < .01:

hours worked per week (+)

average hourly rate (+)

years of experience (+)

percentage of cases taken on contingency (+)

female (-)

dependent children in the home (+)

law school in metro area (-)

After controlling for all of the above factors, proximity to a local law school is associated with lower incomes for small firm lawyers (full regression results here). The obvious rival hypothesis is that lawyers prefer the amenities and social networking found in large urban regions--the same places where law schools are often located. Yet, when I added a control variable for office in a large metropolitan area (all areas in blue in the map above, not just the ones with law schools), the coefficient for "law school in metro area" variable was still negative below the p = .05 level (full regression results here).

Of course, this analysis only applies to Indiana. Because of differences in the local economy, a larger Midwest sample, or one that focuses on the East or West Coast, or the Southeastern states, might produce different pattern of income distribution.

Yet, these results brought to mind one of the findings of Chicago Lawyers II (see Heinz et al., Urban Lawyers (2005)), which replicated the original study 20 years later and found that the income of solo practice lawyers had plummeted in the intervening years (from $99,000 to $55,000 in constant 1995 dollars). Further, 32 percent of the solo practitioners were working a second job in 1995 compared with only 2 percent in 1975.

Greater Chicago has eight law schools, including Valparaiso in the northwest corner of Indiana. In my opinion, before going $100K into debt, it is important for a prospective student to understand (ideally, quantify) the expected return on investment for each school if he or she hopes to practice law in the Chicago metropolitan area. The results of a larger study may persuade some students to pursue opportunities in other markets (or perhaps rural counties) or forgo law school altogether. As tuition continues to climb ahead of inflation, law schools--and the ABA--need to start thinking along these lines.

Comments

Richard,

Excellent point. I had an exchange with Jack Heinz on the above findings, and he made the same observation. In other words, a lawyer in a 1 to 5 lawyer firm is a smaller market is more likely to have a practice that goes beyond personal services. Clearly, this has to be right.

Nonetheless, when I controlled for large metro, the local law school variable was still negative and statistically significant. So both your theory and the local law school hypothesis could be right. To disentangle these effects, we need a different sample with a broader geographic reach.

One distinction not discussed is that a five lawyer firm in a small town is likely to be the biggest firm in the county. It may represent the local banks, the county, the School board and the wealthiest farmers, businesses and individuals in town. A five lawyer firm in a large market is much more likely to represent ordinary individuals.

Carolyn, you raise an excellent point. I have no way of disaggregating which small firm lawyers are serving primarily corporate clients and which are serving individuals, though the 1-5 lawyer firms are more likely to have a non-corporate clientele.

Also, you are right that focusing on averages can obscure the full picture. Solos can make a great living--and have the autonomy that large firm lawyers lack. In my sample, the 90th percentile solos were making $175K in Indianapolis, $188K in other large metros, $195K in small/rural markets, and $225K in mid-sized markets. Obviously, the top 10% have even higher incomes. A couple of months ago, the ABA Journal ran a story on "Million Dollar Solos." So I want to be careful not paint small firm lawyers with a broad brush.

A major caveat is that I am dealing with Indiana lawyers. Washington, DC is a "Global City" that has a very large demand for specialized human capital. The high-end solos in that market may do especially well. Further, in most cases, solo and small firm lawyers have lower overhead than their Big Law counterparts.

There were a couple of factors that are not clear from your study. First, did you examine all solos, or just those who serve consumer populations. It is my experience that solos who are handling telecom, antitrust or energy regulatory work (my specialty) often earn closer to biglaw salaries than those in a consumer oriented practice. Here in the DC area, there are many, many solo or two person shops doing traditionally biglaw work and opportunities are expanding. I would think that if these solos were included in the study, you'd find earnings in metro areas higher.